Glenboden M & A Originations

Kallo Foods an acquisition target as Wessanen downsizes

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Origination Status proprietory origination, December 2010
Asset Kallo Foods (UK), no.1 branded domestic rice-cakes supplier
Buyer candidates include ABF, Raisio
Seller Royal Wessanen NV (Holland), leading European organic foods producer
Buyer Rationale 'new frontier' growth categories (gluten-free, dairy alternative, organic)
Seller Rationale attractive valuation
NBs Wessanen group valuation estimated at x0,5 Sales (see valuation)
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Royal Wessanen continues to struggle to turn itself around, and to divest businesses in the quest for a sustainable business model. If its pure-play organic bet doesn't work, then one interesting asset in its portfolio, in 'new frontier' categories, is Kallo Foods in the UK.

Profitability problem in spite of downsizing ...Wessanen has shrunk its turnover by more than 50% in the last five years (see chart), through divestments and, latterly, organic declines as well.

2009 was the year of 'refocusing' for the group, when it sold its US distribution business, Tree of Life, to Kehe. In that year it made a loss at EBIT level.

2010 is the year of 'fine -tuning of strategy', Wessanen defining itself as an organic foods specialist, where earlier it had a broader remit of authentic ethnic and healthy foods. To that end it's to sell its US mixers business, ABC, in 2011.

... underlying sustainability issue ...But there's a question mark over whether even a downsized and well -honed Wessanen is sustainable; its key challenge is to convert from niche health stores channels to mainstream grocery ones, and that won't happen quickly.

Meanwhile management expects to only break-even at the EBIT level in FY 2010. True, the group is successfully de-leveraging, but that doesn't solve an underlying profitability problem.

To compound matters, Wessanen isn't 'investing in the future' as much as it claims; capex is to be lower than depreciation and amortisation in 2010, which doesn't look good for a 'new frontier' business.

... need to unlock strengths like Kallo ...Overall we don't think Wessanen is sustainable as a 'pure-play' organic foods player; its component parts would survive better in a group that's more heavily weighted in mainstream grocery categories for now.

In that context one of its 'pockets of strength', at least in portfolio terms, is Kallo Foods in the UK. (NB. our valuation is for Wessanen group not just Kallo).

Kallo pioneered the rice-cakes category in that market, and still claims to be the no.1 branded player. Rice-cakes are growing not only in the gluten-free space, but also in better-for-you snacking.

Kallo is also the no.2 dairy -alternatives (soy) player in the UK, having acquired 'So Good' in 2008. Plus it has 'Whole Earth', a pioneer in organic spreads.

... ABF possibly a good fit ...In terms of potential buyers for Kallo, Associated British Foods is an obvious candidate given its recent M&A history's focus on new frontier grocery categories.

Notably in 2008 that group acquired Jordans, a pioneer in crunchy cluster RTE cereals, and merged it with Ryvita, it's long-life breads business. Kallo might be a good bolt-on for that new division.

... Raisio aggressive in M&AA smaller but acquisitive candidate is Raisio, the Finnish grain -based products group, with its strategy of buying better-for-you snacking and other new-frontier businesses, after having sold its mature yellow fats operations in 2009.

Raisio earlier in 2010 acquired Glisten in the UK, a dynamic confectionery group with a recent surge in better-for-you categories ("Dormen' acquisition in 2007).

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Size (€ mln) 350
Sector organic grocery
Asset Quality Europe health food specialist
Seller mid-cap plc
Buyer large plc
P/S 0,5
P/Ebitda n/a
Type value estimate
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